The pound kept tumbling yesterday, weighed by UK PM Johnson’s decision to set a hard deadline for leaving the EU, something that revived fears of a hard Brexit. Today, ahead of tomorrow’s BoE decision, GBP traders may keep an eye on the UK CPIs for November. As for tonight, the BoJ decides on monetary policy. We don’t expect any changes, so attention will be on the Bank’s statement and language.
The pound was for another day the main loser among the G10 currencies. It lost the most ground against CHF, JPY and EUR, while it underperformed the least versus NZD.
The British currency continued feeling the heat of UK PM Johnson’s decision to set a hard deadline for leaving the EU. Remember yesterday we noted that Johnson wants the UK to stop being subject to EU laws by the end of 2020, even if no trade agreement is found by then. This has brought back to light the threat of a hard Brexit in the end of next year, even if the election outcome raised the prospect of the Withdrawal Agreement been approved in Parliament before January 31st.
With new Brexit concerns kicking in, GBP traders largely ignored the somewhat better than expected employment report for October. The unemployment rate held steady at 3.8%, instead of rising to 3.9% as the forecast suggested, while, although average weekly earnings including bonuses slowed more than expected, the excluding bonuses rate came in better than forecast. It ticked down to +3.5% yoy from +3.6%, instead of sliding to +3.4% yoy.
As for our view, we expect the pound to stay largely linked to news and developments surrounding the political scene and the Brexit saga, but today, ahead of tomorrow’s BoE policy decision, GBP traders may keep an eye on the inflation data for November. The headline rate is forecast to have declined further, to +1.4% yoy from +1.5%, while the core one is anticipated to have remained unchanged at +1.7% yoy.
At its previous meeting, the BoE kept interest rates unchanged, but two members voted in favor of a rate cut. In the statement accompanying the decision, officials noted that if global growth fails to stabilize or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in UK GDP growth and inflation. Although at first glance the election outcome was seen as easing the uncertainty surrounding Brexit, Johnson’s stance over the transition period suggests that this element is still on the table. This combined with the latest softness in UK data keep the door to a rate cut still open, and a slowdown in inflation will add to that view. We don’t expect policymakers to take any action at this meeting, but we expect them to reiterate that they remain ready to reinforce the expected GDP and inflation recovery if needed.
The new Brexit concerns weighed on EU equities as well, with most major ones closing in the red, halting a four-day winning streak. The exceptions were Italy’s FTSE MIB and UK’s FTSE 100, which gained 0.45% and 0.08% respectively. European shares may have also been weighed by consumer goods giant Unilever, which tumbled after warning that this year’s sales would grow less that it had projected. In the US, all three indices closed slightly in the green aided by upbeat US economic data. Housing starts and building permits for November came in better than expected, with permits rising to their highest since May 2007. Industrial and manufacturing productions also rebounded more than anticipated. Today, Asian bourses were mixed.
GBP/USD continued tumbling yesterday, falling below the upside support line drawn from the low of November 27th, and erasing all the election-related gains. The slide was stopped near the 1.3070 barrier and today, during the Asian trading, the rate rebounded somewhat. That said, as long as it continues to trade below the aforementioned upside line, we would consider the short-term outlook to have now turned somewhat negative.
If the bears are strong enough to push lower and overcome the 1.3070 zone, we could then see them aiming for the round figure of 1.3000. If they are not willing to stop there either, they may be tempted to target the 1.2950 zone, marked by the inside swing highs of November 27th, 28th and December 2nd. Another break, below 1.2950, could extend the fall towards he low of November 29th, at around 1.2875.
Taking a look at our short-term oscillators, we see that the RSI stands slightly above 30, but shows signs of bottoming, while the MACD lies below both its zero and trigger lines. Both indicators detect negative momentum, but the fact that the RSI shows bottoming signs suggests that a small rebound may be in the works before the bears decide to take charge again.
In order to start examining whether the bulls have woken up, we prefer to wait for a move back above 1.3300, yesterday’s high. The rate would already be above the pre-mentioned upside line, and also above the downside line drawn from the high of December 12th. The bulls may decide to drive the battle towards the 1.3425 barrier, near the high of December 16th, the break of which may extend the advance towards the election peak of 1.3515.
Tonight, during the Asian morning, we have a BoJ interest rate decision. When they last met, Japanese policymakers decided to keep their ultra-loose policy steady, but in the accompanying statement, they altered their forward guidance to signal chances of a future rate cut more clearly. Instead of saying that the current extremely low levels of interest rates are likely to stay unchanged “at least through spring 2020”, they noted that short- and long-term interest rates are expected to remain at their present or lower levels as long as it is necessary to pay close attention to the possibility that the momentum toward achieving the price stability target will be lost. However, they also said that there has been no further increase in that possibility.
Since then, both the National CPI rates remained well below the Bank’s objective of 2%. Specifically, the headline rate held steady at +0.2% yoy, while the core one ticked up to +0.4% yoy from +0.3%. Thus, it would be interesting to see whether policymakers will maintain the view that there is no further increase in that possibility, or whether they will strengthen their wording with regards to a possible rate cut in the months to come. As for our view, it remains the same as back in October. With little space to ease further, the Bank may decide to wait for a few months and perhaps rely on its dovish signals to do the work for now.
USD/JPY has been drifting lower since Monday, when the rate hit resistance fractionally below 109.70, which is the upper bound of the sideways range that’s been containing the price action since November 21st. Having in mind the pair’s trendless mode, we will hold a neutral stance for now, but the fact that the latest slide started from near the range’s upper end make us believe that some further declines within the range may be in the works.
A clear and decisive break below 109.20 may confirm a short-term double top within the range and may open the path toward the 108.93 or 108.85 levels. Another break lower may set the stage for the range’s lower boundary at around 108.43.
Shifting attention to our short-term oscillators, we see that the RSI lies above 50, but points down, while the MACD, although positive, lies below its trigger line, pointing south as well. These indicators suggest that the rate may start picking downside speed soon and support our view for some further short-term declines.
On the upside, we would like to see a strong break above 109.90, which is near the high of May 30th, before we start considering the bullish case. The rate would already be above the upper end of the pre-discussed range and may pave the way towards the 110.35 barrier, marked by the high of May 23rd. A break above 110.35 may carry more upside extensions, perhaps towards the 110.65 hurdle, defined by the high of May 21st.
Apart from the UK CPIs, we also get the final inflation data from the Eurozone, but once again, they are expected to confirm their preliminary estimates. The German Ifo survey for December is coming out. Both the current assessment and business expectations indices are anticipated to have increased to 98.1 and 93.0, from 97.9 and 92.1 respectively, which would drive the business climate index up to 95.5 from 95.0.
We get inflation data from Canada as well. The headline rate is forecast to have increased decently, to +2.2% yoy from +1.9%, but no forecast is currently available for the core rate. The message we got from this month’s BoC gathering is that officials have quickly switched back to neutral, after flirting with the idea of easing at the prior meeting. Thus, accelerating inflation is likely to confirm their choice of taking their hands away from the cut button, and may prove positive for the Loonie.
In the US political scene, the Democratic-led House of Representatives will vote to impeach US President Trump. If impeachment is passed, House lawmakers would have to present the case at a Senate trial. That said, the Senate is controlled by Republicans, who may defend the President. For him to be removed a two-thirds majority is needed, and with Republicans holding 53 of the 100 seats, this appears to be a hard task.
As for tonight, during the Asian morning Thursday, besides the BoJ decision, we also get New Zealand’s GDP for Q3 and Australia’s employment report for November. New Zealand’s GDP is expected to have accelerated to +0.6% from +0.5%, something that would drive the yoy rate up to +2.4% from +2.1%. As for the Australian data, the unemployment rate is forecast to have remained unchanged at 5.3%, while the net change in employment is anticipated to show that the economy has gained 14.0k jobs after losing 19.0k in November.
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